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Gold bugs need a dose of humility

Joel Bainerman
January 31, 2005

Judging from the huge responses from the gold bug community to the my article published on January 9th on 321gold, 110 in total and more than 75 in the first 24 hours alone - I feel that I may have released a valve which desperately needs an outlet - and viewpoints that are not the standard pro-gold arguments - from someone that doesn't publish a newsletter or speak at precious metals investment conferences.

First - despite what so many of the people who took the time to respond to my article wrote (Bob, believe me, your site is very well read and must reach every single gold bug from across every time zone) I am not anti-gold - but merely was presenting my conclusions after being a participant this in this investment sector.

I wasn't at all interested in presenting an "anti-gold" viewpoint - but that is what nearly everyone thought I was doing. The knee-jerk reaction to my arguments taught me a lot about how far gold bugs will go to buy their own product. Only about 10% of the responses didn't try and tell me "your wrong" as the first sentence or questioned my motives. Instead of hearing my arguments first - they nearly all assumed I was doing something terribly wrong (i.e., being down on gold) and that it was their duty to inform me of my error.

Allow me to present my observations after going over the more than 100 emails I received in response to my essay:

Observation Number One:

Most gold bugs are extremely arrogant when it comes to the subject of why one should own gold. Even the sound of someone being "not a fervent gold bug" generated a gut reaction to "attack" the viewpoint - just because it was "not pro-gold" not necessarily anti-gold.

While I am sure most of these people are very objective and willing to listen to all sides of the issue most of the time - when it comes to the subject of gold - most wrap themselves in their arrogance and simply dismiss any other viewpoint as being "uninformed."

One writer pointed out an error in my math. I wrote that in the two years I owned told it registered a 25% gain - when it fact - it was 31% - however as the currency I bought it in went down 40% - I am still not thrilled with the "gold as an insurance policy against a weakening US dollar" argument that I bought into a few years ago.

However most were so comfortable in their knowledge that I was wrong - and that nobody but those who write newsletters promoting gold and mining stocks should be able to give their personal view on a public forum.

Observation Number Two:

Gold bugs think that only they are connected to the Internet.

What I forgot to mention in the article is that six months before I purchased gold and silver in December 2002 - I researched this subject for six months. As an investigative journalist - you can be sure I did my basic homework - and I would be lying if I didn't tell you that every single "pro-gold" argument that everyone has emailed me in the past few days - I know and have known of for more than two and half years.

What is amazing about gold bugs is that they assume they have done their homework so much better than others - and the arrogance is frankly - quite annoying. I can read the same info on the Net as them - and yet when I dared to come to a slightly different conclusion - it was simply "forbidden" to consider.

That is raw arrogance - pure and simple.

Observation Number Three:

What everyone gold bug should accept - is that they are not in charge of how financial markets operate - and should understand the notion as was explained to me by one astute gold bug who wrote me: don't invest in any sector that you believe is manipulated.

That - I believe is the kind of thinking we all need to adopt - and then figure out how to beat them - rather than naively believing that just because 'we know the US dollar and other fiat currencies will eventually collapse" those that control those currencies may not want that to happen - as they may have more to lose than us little guys.

It is not a given that "all the fiat currencies will eventually collapse" and I hand you the Swiss franc, the Canadian dollar - the Australian dollar - and the English pound as fine examples. All might go up and down - but I can't remember the last time any of them "collapsed" in the past 100 years. These economies aren't nearly as shaky as America because they don't have such high debt levels.

So let's cool that argument down a notch. Currencies don't collapse every day - as "fiat" as they may be. They do represent what the economy of these countries has in the way of assets - and as these are very wealthy countries - this is the way it should be. It is only America and its dollar that is up shit's creek - not the rest of the world.

Simply put, if the US dollar depreciates - it must depreciate against another currency. It makes no sense that all world currencies - which admittedly are fiat - can collapse - all at the same time.

Observation Number Four:

Just because the US dollar collapses and life takes a huge turn for the worse in the US - the rest of the world doesn't just automatically fall - and along with them - their fiat currencies. This is paranoia thinking at its worse. These doomsday scenarios are a pile of crap used as propaganda by the gold bulls. The world may be heading for crappier times - but the "gold/fiat currency" issue isn't the only game in town. The fact is - those in charge have no real interest in destroying every economy in the world - and yes they do have a say in that matter. The collapse of more than the US dollar - but that one as well - can and will be avoided by the guys in charge - because it is definitely in their best interest to keep the fraud from ending.

Slave owners may beat their slaves - but they don't kill them because it is not in their economic interest to do so. When the currencies around the world start to crumble - the central bankers will step in and save them by either creating new currencies - create more paper derivatives to create a fresh supply of gold out of thin air to suppress the price or confiscate gold on the claim it is needed to back up the currency - or whatever is needed so that their privileged position is retained.

Somehow most gold bugs have not thought this process through to its logical conclusion and erroneously assume that the central bankers will have no choices once the fiat money they have created starts to crumble. They created it and they can fix it - and they will if it means losing the kingdom they rule over.

Observation Number Five:

So many of those nearly 200 emails to me refused to accept the fact that I had a point - which I did - and it is a point that is rarely heard - that being - that if the US dollar diminishes the same amount as gold goes up - then gold is a pretty crappy sector to be in.

There other options - such as real estate - or a basket of other currencies that also earn interest however such options aren't good enough for gold bugs because they all believe all currencies are doomed - and thus - one day - all paper will be worthless - so therefore - gold is the only answer.

In short - they have all come to believe their own propaganda.

The fact is - real estate is still a great investment in many parts of the world - and here is the proof. I bought a tourist apt in Cyprus in December 2002 - and sold it last month. I bought it for $100K and sold it for $170K. The market was hot - and the dollar depreciated - so I did great. OK. Now, leave out the "hot real estate market" and just consider the fact that I could have protected myself from a diminishing US dollar as well as gold has - by taking that money I invested in gold and silver then - and bought two apartments in Cyprus. Would that no have protected my wealth as well as gold did?

If so - then the obvious answer is - there are other options to the ones gold bulls offer - but can't consider because they are too busy believing their own hot air about how "only gold can protect wealth".

Ok, real estate markets can collapse - but that doesn't usually happen in known tourist markets - nor is it a given just because gold bugs say it is. I knew the market in Cyprus was solid and safe before I bought in - and I could have just as well bought a flat in Southern Spain or a small condo in downtown Toronto - for investment purposes.

What I tried to explain to many of the people who wrote me to tell me how wrong I was - was that I also earned yield - rent - on that asset - in addition to the capital gains I made - in addition to protecting myself against a weakening US dollar. The world didn't collapse in the meantime - and the world's currencies are still around - as well as my Cyprus apartment will be ten years down the line.

The point is nobody should be making investment decisions based on doomsday scenarios. If you own gold because you are waiting for the end of the world - then believe me - you haven't thought about all the fun it will be spending - or surviving - in a world where all the fiat currencies simultaneously collapse. If that is your idea of what to do with your money today - to get something out of your capital today - rather than just accept no yield - then good luck to you all.

The fact is this doomsday that all the gold bugs know will happen - and are investing based on that eventuality - have no idea not only when it will come - or if at all. They just arrogantly assume they are right because so many of the gold bulls on the Net and at the investment conferences have said do. That seems to be the only proof people offered me as to how they were for sure this was the case - because "so and so says so on his website".

It is time we all started thinking for ourselves and stopped so eagerly buying into propaganda from within the pro-gold camp.

Observation Number Six:

One of the most common "don't you understand" comments I got was how fiat currencies "always" fail and thus only gold can protect ones' assets.

The problem with this statement is that it is not a given that all current world currencies will collapse or that gold always moves up against all currencies. It may have happened in the past that gold outperformed or protected itself well against devaluating currencies - but it hasn't always been that way - every year - all the time in all previous bull markets for gold.

One comment warned me: Invest in fiat currencies if you like all have failed in history and all will continue to fail as time goes on.

What the gold bugs lack is instances where such events took place - and any background as to whether these currency collapsed because of other factors - such as what happened in Nazi Germany.

If the reason to buy gold is simply as an insurance policy against collapsing currencies - then I suggest investing in a Swiss annuity fund - which protects against "collapsing currencies" and still manages to earn a yield - albeit a small one. However on the "protection" side of the balance sheet - a Swiss annuity will perform the same function as gold if the concern is a world that is thrashed economically.

Just so it is clear to everyone - I merely used the Euro as my barometer to make a point to show how the bull market in gold is only a bull market if you are holding US dollars. What so many people heard was that I was trying to argue that paper currencies was better than gold - which is not what they are capable of hearing - so they assumed all I wanted to do was promote "fiat currencies".

The reason why I wrote my first essay was to merely point out some of the basic flaws in the arguments of the gold bulls - not second guess in hindsight my investment decision. Yet so many people responded with a very snide tone about "oh sure, in hindsight - we all know the best place to invest" as if I was directly attacking their wisdom - rather than just pointing out some facts which are never addressed by the gold bugs on the Net.

I came to realize that so much of what passes for "justification" in the gold community as to why one should buy gold is nothing but "I know more than you know - because you are not a gold bug like I am."

Observation Number Seven:

Gold bugs for the most part - are US-centric.

One person wrote:

My point is that as the USD increases in value, gold goes down in value in terms of USD. As the USD decreases in value, gold goes up in value in terms of USD. The USD and gold have an inverse relationship. If your currency of trade and the currency you use to live daily remains USD, as is the case for me personally, the inverse relationship serves as an insurance policy against a depreciating USD and consequent reduction in purchasing power translating to a reduction in my personal standard of living.

Quite true. But I don't live in an environment where my standard of living is negatively impacted by a depreciating US dollar. Thus I don't need the same insurance policy that this writer feels is required of him.

Another claimed:

I'd say a 25% return is "a great investment". It wasn't the best return available, but no one has a crystal ball to tell the future.

The fact that the US dollar devalued 40% in the same time period - just didn't seem to bother him. I guess so many gold bulls have no concept of the fact that there are people in the world that invest in currencies other than US dollars.

Gold bugs also love to tell you how the Euros you now own , you will have to cash them in soon , because they will not stand the test of time either. Or how the Euro will definitely follow the US dollar into collapse - just because it has happened so often in history - it must happen again - eventually.

Another reply said:

From what I've been reading re: the Euro economies, they are not in much better shape than the US economy, and I have a feeling the euro is on the verge of weakening.

European economies - as a whole - may not be growing but they don't have anywhere near the debt levels of the US - which is the reason every bull buys gold - at least that is what the propaganda on the Net states. Regardless of what gold bugs think about the underlying structure of the economy of the European Union - there are no signs out there to point to a total collapse of its currency. In fact, the Euro is as strong as what the combined strength or weakness was of all the European currencies were combined before they were replaced with the Euro.

Just because there is slow or no growth all over Europe - doesn't meant the Euro is about to collapse.

Observation Number Eight:

Gold bugs are wishful thinkers that don't bother having to back up anything with hard facts - because they know they are right - why bother trying to prove it.

One person wrote:

All fiat currencies through history have failed and the same will be true in time with the current set of currencies. When? I have no idea. But in case something happens I want to have some protection against "paper".

At least this gold bug was honest enough to know he didn't know when doomsday will come - even if he knew for sure - it would.

As for all currencies being turned into nothing but "worthless paper" this argument is a pitiful excuse to buy gold. Currencies are worth as much as the assets in those national economies - sort of. Yes, gold in the central bank is better way to determine whether a country's currency "should" be stable - but the fact is - rich, western countries with a lot of assets - are likely to have a reasonable-stable currency - as does Canada, Australia, and most of Europe - with a Euro or without one.

Another said:

Gold will ultimately surpass this total flim flam ponzi scheme by all currencies as they all begin a sort of competitive currency devaluation war. How else will these countries survive? So the dollar will fall farther and so will the Euro in due time. This high stakes game by the central bankers will blow up in there face. Gold rose some 2000% from the 70's to the 80's will your toilet paper do that?

This person is a typical gold bug. You can spot a gold bug a mile away because they reek of arrogance thinking they for sure now how all future events will turn out when it comes to world currencies and their relation to the price of gold.

He knows exactly what every country will do when it comes to the upcoming devaluation war - even though such an event is rare - if at all - and a war implies one of them must win - so not all can lose. He also knows that the Euro will most definitely lose all its purchasing power - meaning that no European will be left with anything to buy a loaf of bread with. It is also a given that central bankers are doomed - but knows full well the central bankers run the current show yet is not phased by that - and believes his weapon of owning gold will win out over them. He also likes the fact that gold rose so much - but doesn't explain how come it went down as well - and how that 'downward" decline may take much of the gains of previous stages down with it.

Observation Number Nine:

Most gold bugs are hypocrites. They all will tell you that they buy gold as an insurance policy against fiat currencies collapsing - but never tell you when they plan to sell it.

This statement was typical of many responses I received:

A while further down the road Gold will, itself , soar against all paper currencies just as it did in 79/80.

What do you think this gold bug will do when gold soars and hits the heights it did back in 1980? He will sell it for fiat money! How many will really just hoard it waiting for the day when only he/she will have the wherewithal to buy food and petrol - while everyone else starves?

If gold goes to $1000 - and the gold bugs believe that the bull market has hit its peak - and won't go higher - they will sell their precious goal for the fiat currency they love to loath - in a flash. Who wouldn't - considering the choice at that point will be to hold on to it and watch as you know it will go down in price? Those that wait too long will get less of their fiat currency in return - but everyone will eventually sell. Don't let their propaganda about how they hold gold because "fiat currencies are morally wrong." When push comes to shove and a huge profit is to be made - all but a very small percentage of gold bugs will sell their gold.

Those that refuse - and hold on to it believing that when all the fiat currencies are defeated and only gold is left standing - will quickly realize that as things stand today - gold really is not suited to replace fiat currencies - and that the only problem with a fiat currency is not what it is - but that it isn't backed up by enough gold in the central bank of the country that is issuing it. In the US - that is the issue. In other countries - those that don't print up the amount of currency notes that exceed what the country has in gold stocks - have no problem.

What the gold bugs do is apply the US situation and then apply it to all fiat currencies.

Observation Number Ten:

Gold bugs love to give you advice based on what they believe - and feel it is their duty to inform others of the way they view investment decisions as to whether or not to invest in precious metals.

Piece of Advice #1

We don't play the gold game to get rich but to keep what we have. All you gotta do is change your rational for holding metal. Then everything will fall into place

Why should I make any investment decision based on "not getting rich" even if doomsday is approaching? Gold bugs do - yet they may be disappointed when the "doomsday" doesn't come - or doesn't come for another 30 years. Whether their capital is earning any return as well as being protected never seems to become part of the debate. Why not earn some return of the capital until doomsday comes? If doomsday does come - a real estate asset will be worth something - to someone - no?

Piece of Advice #2

There is no currency(legal tender and or iou) that has survived any where near as gold has in the past 5000 years that you could have left over to your progeny.

Leaving over real estate is not a bad asset to leave your children. Why do gold bulls always assume that there is only option available to us?

Piece of Advice #3

You state: "And unlike that money sitting in a bank account earning some interest - my gold and silver investments earned me zero interest/yield."

If you are strictly interested in gains, then you are investing in Gold for the wrong reason. Remember, Gold and Silver are more of a hedge in case the Sh*t Hits The Fan.

What is missing from this piece of advice is the proof that the sh*t will definitely hit the fan - and what might happen if it doesn't.

Piece of Advice #4

There's just too much in your article to rebuff and it all has to do with your mixing "protection" with "investing". If you really feel you need to protect your assets, buy physical and hold on to it. If you want to make returns, buy futures and equities, and trade in and out. Simple as that I too have gold and silver bullion, but not for investment purposes. I hold it for "insurance" purposes. Similar to health, life, housing, auto insurance, gold and silver bullion provide me with such a similar safety factor for my finances.

Safe returns - such as in government bonds from countries that aren't awash in debt - or in real estate in politically-safe environments - is simply not an option with gold bulls. It is either gold - or nothing. They simply can't be wrong about anything.

I believe real estate in politically-stable countries can serve this same purpose as an insurance policy - but also earn a decent yield in the meantime.

Piece of Advice #5

Dear Mr. Bainerman:

Your essay on 321 Gold is remarkable in it's naiveté. Gold in these bizarre times has it's place in any portfolio as a hedge against catastrophe (too many potential ones to list).

Notice how he didn't mention one catastrophe let alone one that would prove beyond any doubt his basic contention. Gold bugs don't seem bothered with providing facts to back up their contentions. They just assume everyone else who doesn't agree with them are "naive".

Regardless of what the pro-gold community contend - I have come to understand that the world's major currencies are all not going to collapse at once - leaving all countries impoverished - nor are the central bankers going to allow this - because then what would they be left ruling over? I don't believe it is a given that they "have no choice". This is an assumption that every gold bug takes as a given without any proof to back up the claim.

Gold is not the only game in town - today - nor even when doomsday comes. There are other options which gold bugs won't even consider as legitimate because they are so wrapped up with their propaganda to allow any other viewpoints in the door. There are clearly good - perhaps even much better options out there which offer as good of protection in case of doomsday - and in the meantime - earns a yield on capital.

So while yes, gold may be a great way to protect wealth in the worse of times and when all fiat currencies are demolished - that day may never come - and if it does - it may not be for 30-50 years - much too long for most current precious metals investors to worry about.

The point of my first article which few gold bugs could easily see was merely to prove the contention wrong that "only gold can protect against a diminishing US dollar".

You can own real estate in politically-stable environments and still protect yourself - just as well as gold - and still get some yield. You can buy Swedish and Norwegian government bonds (as politically-stable as they come with very little national debt burdens) - get a yield - and have a good comfort level that that the these governments and their currencies are not going to suddenly just go belly up because of a weakening US dollar.

It is time all gold bugs woke up and smelled the roses: the assumptions and conclusions that have been part of this investment sector and which forms the basis for the decision making process of many small investors - may be flawed.

It is possible that even gold bugs can be wrong.

P.S. If you are going to reply to this article - please don't assume I have never heard any arguments in favor of owning gold - or tell me how in hindsight - we would all make the best investment decisions. I really don't need to hear why you personally purchased precious metals because your asset base does not belong to me. We all make our own investment decisions. What I have done is merely provided a friendly (an insider, I still own gold and silver) alternative view of an investment sector that simply has never tolerated one. My intentions are as honest as yours and my knowledge and perceptions of how the world's economy no less precise than your own.

January, 2005
Joel Bainerman
Zichron Yaacov, Israel

Joel Bainerman is a former high tech journalist who left the field of high tech - due to the immorality of high tech valuations - for the more realistic world of mining stocks.

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